Time to tell Tata – The Big Story News
Nothing seems to be going for Cyrus Pallonji Mistry, 52, former president of Tata Sons and descendant of the Shapoorji Pallonji (SP) group. On March 26 this year, the Supreme Court upheld his ouster from the presidency of the Tata group in October 2016, just three years after taking over from Ratan Tata as the head of one of India’s largest private sector conglomerates. . This could mark the beginning of the end of the Mistry family’s historic association with the Tatas, an 84-year affair that began with Shapoorji Pallonji buying a 12.5% stake in Tata Sons from the heirs of financier FE Dinshaw in 1936. The importance of this development is not only pecuniary; the business families were so close that Cyrus’ father, Pallonji Mistry, was once described as the “ghost of Bombay House” (the headquarters of the Tata Group) for his quiet influence over the business empire of Auntie.
Supreme Court ruling ends more than three-year battle between Cyrus Mistry, whose family, Tata Sons’ largest shareholder after Tata Trusts, own an 18.4% stake in the company, and the group Auntie. After being ousted from the board of directors of Tata Sons, Mistry was subsequently also removed from the boards of directors of individual companies, a process which also saw the departure of supporters like Nusli Wadia, chairman of the Wadia Group, of the Tata group companies.
A SMILE RELATIONSHIP
Now that the case has been closed in favor of the Tatas, the focus is on the way forward. Since it is quite clear that the relationship between the Tata and Mistry families has reached its lowest level, it is probably only a matter of time before both parties, with the Mistry selling their stake in Tata Sons to the Tatas. , who have the right of first refusal. This may prove to be essential, as the SP Group is grappling with growing debt, its main engineering, construction and real estate activities having suffered during the pandemic. He contacted lenders for a one-time debt restructuring exercise. According to the ICRA rating agency, the total debt repayment obligation in 2020-2021 of Shapoorji Pallonji and Company (SPC), the flagship of the 150-year-old SP group, is around
Rs 5,320 crore at a stand-alone level and Rs 10,000 crore at a consolidated level. The consolidated debt of the SP group increased from Rs 19,981 crore in FY2017 to Rs 31,035 crore in FY2019. (Cyrus’ brother, Shapoor Mistry, is the chairman of the SP group and the SPC.)
Even before the SC’s verdict was delivered, the Mistry’s had complained that they were not allowed to take action to raise capital. The SP group had pledged half of its 18.4% stake in Tata Sons to Axis Bank and IDBI Bank for Rs 5,074 crore. However, Tata Sons moved the Supreme Court, barring the SP group from pledging further shares, even as the SP group has reportedly been in talks with Toronto-based Brookfield Asset Management to raise an additional Rs 3,750 crore. Engaging their stake in Tata Sons had never been the first option for the Mistry. Over the past two years, SPC has pledged shares in operating companies such as Forbes & Company, Sterling & Wilson, Afcons Infrastructure and Sterling & Wilson Solar, and has also approached various lenders for capital. Reports say the first sign of trouble came when developers failed to return contributions to the Sterling & Wilson Solar group company in June of last year.
THE PROBLEMS OF MISTRYS
A classic case of how the SP Group, which was one of India’s leading engineering and construction companies, got into debt, forcing it into debt restructuring, is a classic case of the plummeting fortunes of the Indian businessmen and their companies with high debt. Driven by cheap debt, a host of engineering, infrastructure and real estate companies in India have forecast massive expansions in recent years, only to see many projects fail as the economy slows and that the Covid-19 lockdown and resulting restrictions have further slowed businesses down. .
In October 2020, ICRA downgraded SPC’s rating due to its limited finances after the Supreme Court ordered the suspension of its Tata Sons pledge of shares to raise capital. The downgrade also reflects the impact of Covid-19 on the construction and real estate sectors. In its report, the ICRA said that the SPC had defaulted on its repayment obligations due to its weak finances.
While the developers injected nearly Rs 3,875 crore into SPC in FY2020, including around Rs 1,900 crore from Sterling & Wilson Solar’s initial public offering, this money has been deployed to meet financing needs of several group companies. During the previous fiscal year through October, the promoters injected around Rs 270 crore to support the debt repayment obligations. Although the SP group has successfully ceded 258 MW of operational solar projects to a private equity firm in April 2020, the group’s asset monetization plan could be delayed, given the weak economic environment. current.
“ While the SP group has announced its intention to sell its entire stake in TSPL (Tata Sons Private Limited), and the Tata group has expressed its willingness to buy back its stake, which is a positive development for SP Group from a long-term perspective. , the valuation and the timing of the transaction are currently uncertain, ”indicates the ICRA note. Recent reports indicate that the SP Group had a two-year hiatus after the KV Kamath committee approved a one-time restructuring exercise to strengthen its balance sheet and reduce debt by monetizing assets.
So what would be a fair assessment of the SP group’s stake in Tata Sons? In September 2020, when it decided to part ways with Tata Sons, the SP group suggested a valuation of Rs 1.78 lakh crore. However, the Tatas valued participation at less than half of that figure, claiming that since Tata Sons as a whole was valued between Rs 3.8-4.3 lakh crore by Chartered Accountant YH Malegam in 2016, the participation of 18.6% of the SP group was worth around Rs 70,000-80,000 crore. So far, although the Tatas have been successful in preventing the SP group from pledging their Tata Sons shares to raise capital, the Mistry share buyback involves many complications. The two sides will have to agree on a valuation, and it is far from clear how the Tatas will finance the acquisition. Tata’s activities, with the exception of Tata Consultancy Services (TCS), are also heavily indebted.
Tata Sons, as a holding company, earns income from dividends paid by its major subsidiaries, including TCS, Tata Motors, Tata Steel and Tata Chemicals. He would have earned a total dividend of Rs 24,000 crore from his various group companies during fiscal year 2020, with TCS alone contributing nearly 90% of the total. But that won’t be enough to buy the Mistry family’s stake. The Tatas will probably have to sell part of their shares in the companies of the group. They could, for example, sell part of their stake in TCS, of which Tata Sons owns 72 percent. However, as a market source put it, “The Tatas are unlikely to want to reduce their stake in group companies at this point. Tata Sons could also raise long-term debt capital to buy out the Mistry. “
As for the Mistry, experts say it would be better for the SP group to sell their shares back to the Tatas for fair value and exit in a cordial manner. “In addition to the decision regarding Mistry, the SC also confirmed the conversion of Tata Sons to a private company. An investment in a private company like Tata Sons does not give the SP group any management or voting rights, except for the annual dividend, ”said HP Ranina, a well-known Supreme Court lawyer. In addition, Tata Sons’ articles of association are such that they can require minority shareholders to resell their shares to them or to parties they designate. “It’s a very precarious position for the SP group. It does not make sense to approach the courts about the valuation, so it is best to accept the fair valuation offered. In addition, they had paid a negligible amount for Tata’s stake on their first purchase, which is incomparable with the current valuation. Since the SP group cannot sell or pledge the shares to a third party, they represent, in a sense, as much of an expense as an asset. Ranina says the Rs 70,000-80,000 crore Tata Sons could offer the SP group seems fair, but a new assessment could also be made by someone as reliable as Malegam. Basically, this sum would also allow the Mistry to pay off their debts.
A HISTORICAL BATTLE
Cyrus Mistry’s fight against the Tata group will go down in Indian business history as one of the fiercest. He had challenged his dismissal before the National Court of Company Law and, failing to find redress, he moved the National Court of Appeal for Company Law (NCLAT), which ordered his reinstatement as chairman of the group Tata in December 2019. However, the Tata Group took the case to the Supreme Court, which, after hearing the case for over a year, ruled in favor of the Tatas. Without cutting words, a bench consisting of Chief Justice SA Bobde and Justices AS Bopanna and V. Ramasubramanian said: “In fact, Tata Sons can today admit that an important decision the council made on March 16 2012 (the appointment of Cyrus Mistry as Executive Vice President as a forerunner to appoint him President) certainly turned out to be the wrong decision of a lifetime. He blamed Mistry and the SP group for igniting the fight with the Tata group. “In any case, the dismissal of a person from the post of executive chairman cannot be qualified as oppression or prejudicial”, declared the judgment of the SC. A letter sent to the SP group asking for comments on the Supreme Court’s decision went unanswered.
With the SPC getting a nod for a one-time restructuring, the Mistry should feel a little relieved. They will do their best to make new deals with the banks to reduce their debt. In this case, the SP group will not be in a hurry to sell its stake in Tata Sons, but will prefer to focus on reducing its debt without having to depend on the sale of the stake. It might give the Mistry a break. The Tata Group is also getting a clear path to pursue what it believes is best to revitalize some of its declining businesses and prepare them for the future. The Mistry, meanwhile, have some introspection to revive their business and overcome the bitterness of this long confrontation with the Tatas.